Japan - June 2021

S P OT L I G H T
Savills Research

Tokyo Office SupplyTokyo Office Supply

Whilst the worst appears to be over, concerns
linger over secondary vacancy and future supply
Summary• The large influx of supply that2020 brought to the Grade A
office market has been mostly
absorbed. With limited supply
expected in 2021 and 2022, theTokyo office market should havetime to cope with the secondary
vacancy that is likely to emerge
later this year.
• The next milestone for supply inthe central five wards (C5W) will
be in 2023, with nearly 350,000
tsubo of GFA estimated to comeonline. Thereafter, 2025 will
be in focus with an estimated500,000 tsubo of GFA coming
online.
• Toranomon, Minato will lead thenext supply influx in 2023 and2024 with the completion of the
Toranomon-Azabudai project.
Other submarkets such as
Shibaura & Hamamatsucho and
Shibuya will also be seeing large
supply.
• Various economic indicators areshowing that the economy isundergoing recovery, although
the delayed start of vaccinationsin Japan may slow the recoveryof the overall economy, including
the Tokyo office market.
• As the post-pandemic worldcomes into view, the officemarket has started to show its
ability to adapt by addressing
diversifying tenant needs.
Location, and to a lesser extent
flexibility in leasing, now matter
more than ever in order toattract tenants.
• Mixed-use office developments
will have features and amenities
that meet the diverse demand oftenants, including a flexible work
style that is expected to stay
post-pandemic.

SUPPLY PIPELINE
Until recently, competition for new office space
was so fierce that buildings would often be fully
leased long before completion. For this reason,
the office market had fared better than expected,
despite looming concerns over the significant
levels of supply in 2018 and 2020. Needless to say,the COVID-19 outbreak in early 2020 has clouded
the sector’s previously optimistic prospects, andthis is reflected in both Grade A office vacancy
rates and rents in the C5W. For instance, theformer saw a marked loosening from near zero
to 1.2% as of Q1/2021. Meanwhile, rents havedeclined 5.3% year-on-year (YoY) to JPY35,800
per tsubo per month over the same period. At
the ward level, having notably outperformed
its peers pre-pandemic, Shibuya bore the bruntof the pandemic as a result of its larger tenantpool of technology companies. Looking ahead,with office demand weakening, secondary
vacancy derived from last year’s supply is likely tomaterialise later this year and may exacerbate thecurrent situation. That said, the limited supply
in 2021 and 2022 should provide a much-needed
respite for the market, with both years expecting
to see less than 30% of the supply in 2020 (Graph
1).
Turning to specific developments expected
in 2021, notable projects include Tokiwabashi
Tower1, the first phase of an even larger project
which includes Torch Tower – expected to be
Japan’s tallest office tower in 2027, and Hibiya
Fort Tower2. Somewhat impressively, these two
projects alone will account for around 50% of the
130,000 tsubo of GFA that the C5W will see this
1 Formerly Tokiwabashi Project Building A
2 Formerly Shinbashi Tamuracho Project

TABLE 1: Major Development Projects in Tokyo, 2021 to 2025

BUILDING NAME

GFA
YEAR
(TSUBO)SUBMARKETFLOORSTokyo Torch Tokiwabashi Tower

Marunouchi & Otemachi

37

44,000Hibiya Fort Tower

Toranomon & Kamiyacho

27

32,000Nihonbashi & Yaesu

45

86,000Toranomon · Azabudai A

Toranomon & Kamiyacho

65

140,000

Toranomon · Azabudai B1Toranomon & Kamiyacho

63

51,000

TTM Project

Shibaura & Hamamatsucho

29

34,000Toranomon Hills Station Tower(Formally 1&2 Chome A)

Toranomon & Kamiyacho

49

77,000Nihonbashi & Yaesu

45

42,000

Shibuya & Ebisu

39

56,000Toranomon & Kamiyacho

38

55,000Mita 3-4 Chome A1

Shibaura &Hamamatsucho

42

60,000Shin-Toda Building

Nihonbashi & Yaesu

28

31,000Akasaka 2 Chome Project

Akasaka & Roppongi

4363,000

Shibaura 1 Chome Project S

Shibaura & Hamamatsucho

45

68,000Nihonbashi 1 Chome C

Nihonbashi & Yaesu

51

112,000

Nishi Azabu 3 Chome NE

Akasaka & Roppongi

55

30,000Yaesu 1 chome East B

Nihonbashi & Yaesu

54

68,000Shinagawa Redevelopment Project 1st
Phase 3rd Block

Shinagawa & Osaki

31

64,000Shinagawa Redevelopment Project 1st
Phase 4th Block

Shinagawa & Osaki

30

139,000

Higashi Ikebukuro 1-Chome Project

Ikebukuro30

44,000Hamamatsucho 2-Chome A-1 Tower

Shibaura & Hamamatsucho

37

44,000Toranomon 1-Chome East Redevelopment

Toranomon & Kamiyacho

30

38,0002021

Tokyo Midtown Yaesu

Park Tower Kachi Doki Mid
Shibuya Sakuragaoka A
Toranomon 2-Chome Centre
Redevelopment (Businness Tower)

2022

2023

2024

2025

*Projects with total GFA of over 30,000 tsubo
Source Savills Research & Consultancy

savills.co.jp/insight-and-opinion/2

Tokyo Office Supply

year. Next year, the largest project will be Tokyo
Midtown Yaesu, the third Midtown project
following Tokyo Midtown and Tokyo Midtown
Hibiya (Table 1). In fact, the Yaesu area isundergoing a complete overhaul, with multiple
large-scale projects scheduled to be completed
by 2030.
Following these two relatively quiet years,
the next wave of large supply is expected in
2023. Interestingly, one notable characteristicof this influx is the high concentrationof a small number of large-scale projects
within the Toranomon submarket. Namely,
the Toranomon Azabudai project and thetentatively named Toranomon Hills Station
Tower by Mori Building, which will bringapproximately 100,000 tsubo of NRA to themarket in total. Whilst sizeable, there is plentyof appeal for these projects, especially given thepast success of the redevelopment of Roppongi.
Indeed, the attraction of being in a city withina city and the immaculate local infrastructurethat underpins the area are certainly some of
the factors that may steal some of the limelightfrom other developments slated for 2023. In
the same submarket, the business tower of the
Toranomon 2-chome redevelopment project,which is being carried out by a consortium of six
companies3, will provide another 30,000 tsubo
of NRA.
Considering that all these projects in
Toranomon represent well over 10% of theward’s overall office stock on an NRA basis, it
clearly provides a sense of the scale of what is
to come that year. As such, absorbing such ahigh level of office space in the same submarket
simultaneously will not be an easy task, and thelikely result will be a temporary softening of themarket. Unsurprisingly, the reaction to this new
supply has the potential to change the direction
3 Nippon Steel Kowa Real Estate, Dai-ichi Life Group, Kanden
Realty & Development, Tokyo Gas Real Estate, Kyushu
Railway Company, and Taisei Corporation.

The shift towards teleworking
appears manageable for the Tokyo
Grade A office market for now. Evenso, looming concerns remain overthe emergence of secondary vacancy
from offices newly supplied during
2020, as well as the elevated supply
levels expected in 2023. For thetime being, the market has paused,while the acceleration of the vaccine
rollout should act as a tailwind for an
eventual economic recovery, and by
proxy, a revival of office demand.
of the overall Tokyo office market moving
forward. On top of Toranomon, Minato appears
to have a packed schedule with other large
single-building developments. Some of these
may struggle especially when compared to thecomprehensive developments in Toranomon.
Not wanting to be left out, another wardthat will also see a large influx of supply in 2023
is Shibuya. However, it is not all good news
with the ward at a delicate juncture. Looking
at Shibuya before the onset of COVID-19,
for instance, the ward seemed to have it all:vacancy levels were at rock-bottom, and rental
growth comfortably outpaced its peers thanks
to its newfound status as a hub for technology

GRAPH 1: Combined Office Supply (GFA) Estimates for the C5W and the 18W, 2020
to 2024
C5W

18W

23W Long-Term Average*

600

GFA (THOUSAND TSUBO)

500

22%

400
8%
300

200
19%

29%

2021

2022

4%

100

0
2020

2023

2024

Source Savills Research & Consultancy*From 2020 to 2024

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firms and start-ups. Thus, any additional supply
appeared welcome, and even necessary to relax
its air-tight office vacancy. When the pandemic
hit, however, these tenants were quick to adopt
remote work arrangements, and the submarket
quickly saw a notable weakening in demand.
Against this backdrop, large-scale projects suchas the Sakuragaoka District redevelopment– adding over 20,000 tsubo of NRA to themarket, approximately 10% of Shibuya’s Grade
A office stock – have the potential to disturb
the delicate equilibrium between supply anddemand at present. Even so, over the longer
term, the area maintains its strong appeal asa hub for the technology sector. And with theever-growing calls for digital transformation(DX) in Japan acting as a tailwind for the sector,
demand for office space should strengthen as aresult. At the same time, there are also positives
on the supply side. Here, Tokyu Land – adriving force behind Shibuya’s redevelopment– has been experimenting with flexible leaseterms which should be particularly appealing
to the fast-moving start-ups that the ward istrying to attract. Nonetheless, with plenty ofuncertainties lingering, the sudden supply spikein 2023 could be worrisome.
Not only has there been an adjustment in
the supply of offices over the past few years,
but change is also afoot in the buildings
themselves. Specifically, the increase in mixeduse developments has brought additionalfoot traffic to the area, whilst also providing
landlords with diversified streams of revenue. A
prime example of this is Tokyo Hibiya Midtown– completed in March 2018 – which welcomedaround 22 million visitors, and with it, broughtin nearly 16 billion yen in profits within its
first year of opening. Elsewhere, anothernew development: Shibuya Scramble Square,Tokyo Office Supply

GRAPH 2: Total Office Stock by Ward and Percentage Increase, 2020 to 2024
2020

2021F

2022F

2023F

2024F

Total Growth (%) 2020-2024 (RHS)

5.0

16%

4.5

14%

GFA (MILLION TSUBO)

4.0

12%

3.5

10%

3.0
2.5

8%

2.0

6%

1.5

4%

1.0

2%

0.5
0.0

0%
MinatoChiyodaChuo

Shinjuku

Shibuya

Source Miki Shoji, Savills Research & Consultancy

GRAPH 3: Supply by Submarket, 2020 vs 2021 to 2024
2020

2021F

2022F

2023F

2024F

Toranomon & Roppongi

Shibaura & Hamamatsucho

Marunouchi & Otemachi

Nihonbashi & Yaesu

Shibuya

Shinjuku
0

100,000

200,000

300,000

SUPPLY OF GFA IN TSUBO
Source Savills Research & Consultancy

GRAPH 4: Grade A Rent vs Corporate Profits Index, 2008 to Q1/2021
Recurring Profit

Grade A Office Rent

200
180
160
Q1/2008 = 100

140
120
100
80
60
40
20

2008 2009 2010

2011

2012

2013 2014 2015 2016

2017

Q1

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

0
2018 2019 2020 21

Source Ministry of Finance, Savills Research & Consultancy

savills.co.jp/insight-and-opinion/4

welcomed nearly 6 million visitors in the first
four months of its opening in November 2019.
With the appeal of these mixed-use offices
clear to see, their adaptable and diverse
tenant demand, where a flexible work style ismore common, should be particularly wellsuited in the post-pandemic environment.
Further emphasising this view is the fact that
residential units in these areas have remained
popular due to their prime urban locations.
Impressively, according to the Real Estate
Economic Institute, the average 23W Tokyo
condominium price per sq m increased by
11% YoY in 2020. Furthermore, this trend isunlikely to wane any time soon consideringthat the C5W has experienced some of thehighest population growth over the last
decade, whilst simultaneously boasting agreater ratio of workers working and livingin the same ward compared to the other
18W. Indeed, the vibrancy that these mini
communities could bring to the local area willcertainly be of benefit to tenants and landlords
alike, potentially boosting the value of thesurrounding amenities.
To sum up, these major projects expected
in 2023 should attract strong interest due totheir favourable locations, state-of-the-art
facilities and the mixed-use components thatwill supplement these developments. At rental
levels that are reasonable enough to attract
tenants to fill large floor plates, we believe theseprojects could capture expansion and relocation
demand from tenants in older office buildings.
That said, concerns remain. In particular, theconcentration of large supply in a certain areaat the same time is likely to soften the market
temporarily at the very least. A more imminent
challenge for the Tokyo market could be thesecondary vacancy derived from the large
2020 supply. As discussed in the later section,
whether there will be sufficient demand to fill
the gap should depend on how fast the economy
is able to recover.
ECONOMIC CONDITIONS
2020 was clearly a troubled year for the Tokyo
office market, with vacancy rates and rents
weakening considerably in concert with acontracting domestic economy. Some green
shoots have emerged, however. For starters,
according to the March 2021 Tankan4,
confidence is slowly returning to a majority
of companies, irrespective of size. Moreover,Japanese corporate performance has reboundedstrongly from the sharp declines during thesecond and third quarters of 2020 – posting a
20% YoY gain in recurring profits as of Q1/2021.
Further, a third of listed companies in Japan
have announced plans to increase dividends
in this fiscal period. Of course, whilst costcutting can partly explain this improvement,a sharp uptick in exports of products such ascars and electric equipment to the U.S. andChina has also been a major boon. To be sure,
the recent restrictions on business hours and4 Tankan is a short-term economic survey of nearly 10,000
enterprises in Japan conducted by the Bank of Japan.

Tokyo Office Supply

the delayed start of the vaccine rollout willundoubtably slow the return of employment
and discretionary in-store spending to prepandemic levels. Overall, however, with somemomentum building, a moderate recovery is
still expected in 2021, and this is backed up by
respondents of the Tankan indicating a general
optimism for growth during the rest of the year.
In truth, economic activity is likely to recoverin earnest in 2022, and this includes the muchmaligned hospitality sector. By mid-2022,
domestic demand should be back in full swing,
driving the country’s GDP back to pre-COVID
levels – something that is vital if there is any
hope for the large office supply in 2023 to beabsorbed. Indeed, the successful economic
recovery is likely to rekindle concerns of alabour shortage, which is expected to support

Understandably, with some flexible work
arrangements now a permanent fixture of daily
life, it will be a challenge for office utilisation
rates to return to previous highs. Also, the factthat office interior design companies have seen
strong performance may be an indicator ofwhat will come next. Indeed, some companies
may return extra office space and have a freeaddress layout instead, while other financiallyweaker tenants may continue to vacate
permanently to reduce costs.

Grade A office demand as attracting talent
becomes more difficult. Specifically, high-end
modern buildings are especially likely to have acompetitive advantage in such an environment.
Indeed, amid the proliferation of teleworking
environments, these offices will surely reinvent
themselves as a place of collaboration andin-person social interaction. Moreover, further
emphasis will be placed on central locations
and convenient access to maximize the numberof staff who can easily commute to the office,
now that commuting for some is viewed as a
productivity drain. Tenant movements toward
these offices in convenient locations will keep
prime areas sound over the mid-term.
Whilst an overall recovery in the office sector
may become more apparent, it is doubtful that
this will be the case for all grades and locations.

FORECAST OF RENT AND VACANCY
Given the discussions thus far, we expect
vacancy rates to loosen and rents to see further
corrections during 2021. Clearly, the delayed
start of the vaccine rollout will stall any chanceof bringing workers back to the office, andthe manifestation of secondary vacancy fromthe large supply in 2020 will impede Tokyo’s
office market recovery. This will be especiallyapparent in office buildings that are lessaccessible. On the plus side, 2022 should serve
as a buffer and provide enough time for the
economy to fully open.
Further down the line, the aforementioned
supply influx in 2023 remains a headache.
Any pain will be soothed, however, with thefull recovery of the Japanese economy andsubsequent rekindling of office demand helping
push rents higher once more. Moreover, notonly is 2023 a significant year for office supply,
but it is also likely to have ramifications forthe next wave slated for 2025 – where supply
is currently forecasted to be more than 40%
larger than the supply in 2023. Whilst concerns
regarding vacancy are too early to assess,
it is worth noting that a large proportion of
the total supply, most of which is Grade A, isattributed to a few developers. As such, they
may shift their focus towards tenants with

GRAPH 5: Grade A Vacancy Rate and Rent Forecasts, 2001 to 2023F
Rent (LHS)

Vacancy (RHS)
Forecast

8%

2023F

2021F

2022F

2019

2020

2017

2018

2015

0%
2016

20,000
2013

1%

2014

25,000

2011

2%

2012

30,000

2010

3%

2009

35,000

2007

4%

2008

40,000

2005

5%

2006

45,000

2003

6%

2004

50,000

2001

7%

2002

55,000VACANCY

JPY / TSUBO / MONTH

60,000Source Miki Shoji, Sanko Real Estate, Savills Research & Consultancy

MAP 1: Vacancy within each submarket as of May 2021

0.1%

1.2%
¥31.6

1.2%

0.5%

1.7%

2.5%
3.2%

1.0%

1.7%

Source Savills Research & Consultancy

5Tokyo Office Supply

better creditworthiness and building long-term
relationships with prospective tenants, rather thanachieving higher rents. Not only would this help
alleviate some concerns over vacancy, but it should
also positively impact market sentiment during theinflux of new supply. 2023, therefore, looks set to bepivotal for the longer-term health of the market.
When looking at the ward-level, some are expected
to outperform others. Here, Chiyoda and Chuoshould remain stable given their concentration oflarge Japanese corporations, ease of access, andcentral locations. In fact, Chiyoda is the only wardthat has managed to hold vacancy levels flat since
the onset of COVID-19. Elsewhere, Minato, which
witnessed a similar amount of GFA expansion in2020 as Chiyoda, has been dealt the double whammyof loosening vacancy rates and rents falling by double
in comparison. Perhaps the fact that two of Minato’s
main submarkets have almost double the vacancy ofother submarkets within the C5W (Map 1) is partly toblame. Meanwhile, Shibuya’s rents and vacancy havestabilised after a sharp correction, maybe suggestingthat a liking for more central offices near majortransit hubs still rings true.
To sum up, due to a somewhat frail economy,
combined with the effects of flexible working
practices reducing the need of office space, we
predict that rents will continue to weaken heading
into 2023 (Graph 4). At the same time, while vacancy
levels in less convenient parts of the city rise, rates
in prime areas and superior buildings should remainsound. As a result, we expect a slight loosening overthe same period, although some tightening may
emerge in 2022 as rents adjust to attract tenants.

OUTLOOK
Whilst the COVID-19 outbreak has dampened any
previous optimism, there are some signs of stability
when looking at certain sections of the market.
On one hand, the pandemic has inadvertently
cancelled many plans to expand, with some tenants
now looking to downsize. Yet, the two largest
developments this year, Tokiwabashi Tower andHibiya Fort Tower, are almost entirely pre-leased.
Even more impressive is the fact that office supply
planned for 2021 is over 80% pre-leased or filled.
Indeed, it would seem that newer developments
within the Grade A office market should be able todemonstrate stability, whilst ill-located offices may beon course to struggle.
Meanwhile, the market’s reaction to theproliferation of remote work continues to add to theuncertainty. At the same time, efforts to accelerate
DX could further change working practices andpossibly the high-context work culture in Japan – apotential headwind to the mid-term prospects for thesector.
Fundamentally, however, the office is necessary as
a place for collaboration, nurturing corporate culture,and creating a sense of belonging. Hence, we predictthat a hybrid model will gain more ground, as it has in
the past months, with free-address layouts increasing
dramatically. Landlords who find themselves leaning
towards this style may find it advantageous to offer
flexible lease contracts and pre-established officespaces. In such a model, employees will generally go
to the main office but occasionally utilise a satellite
office closer to residential hubs or work from home,even post-pandemic. Also, a hybrid model on a large

scale will make commuting to central offices easierwith less crowded trains, as well as increase the spaceand comfort at central offices. It is not surprise,
therefore, to see a rapid expansion of such services
in response. Whilst demand for these satellite offices
is strong, it is likely to be limited to convenient
locations such as station fronts where employees caneasily commute to. In contrast, in the case of lower
grade offices, employees are more likely to commute
every day as a result of the inadequacies in the IT
infrastructure of a typical tenant.
Looking ahead, whilst the sharp uptick in supply
slated for 2025 remains far off, the current plans for
expansion are worth keeping in mind. Even so, withmajor market participants in that year suffering
financially as a consequence of the pandemic, plans
may change and/or be delayed. The much-discussed
Maglev Line project, meanwhile, is set to be delayed
and there does not appear to be much impetus toaccelerate the development in Shinagawa, where theterminal station is planned.
All things considered, therefore, the largest
concerns for the market in the short-term are
twofold: secondary vacancy deriving from last year’s
supply, and the next surge in 2023. With plenty ofuncertainties in between, including the timescale
for a vaccine rollout-induced economic recovery,
market participants will keep a keen eye on the
sector’s preparedness heading into 2023 during
these quieter years. For now, the market is likely todemonstrate some stability, with any adjustments
being manageable, particularly concerning thenormalisation of teleworking practices.

For more information about this report, please contact us
Savills Japan

Savills Research

Christian Mancini
CEO, Asia Pacific(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Tetsuya Kaneko
Managing Director,
Research & Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Regional Head of Research& Consultancy, Asia Pacific+852 2842 4573
ssmith@savills.com.hk

Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offices and associates throughout the Americas, the UK,continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative
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